What to Expect with a Sales Tax Audit and How To Prepare
A sales tax auditor wants to ensure that you have been reporting the appropriate amount of sales tax. Auditors want to enforce state tax compliance and apply penalties to fraudulent activities when necessary. Audits are also a way for the state to ensure they are getting their fair share of revenue through taxation.
The auditor can look back through a handful of sales tax records, sometimes two to three years back. There is a chance your state has a statute of limitations that only allows auditors to look back through tax records up until a certain point. For example, the statute of limitations for a tax audit in Texas is four years.
Though a sales audit can bring on feelings of frustration and distress, it is possible to minimize the stress of going through an audit by knowing what to expect. Once you have received notice that you will be audited, it is easy to freeze or to try to ignore the notification altogether. We strongly advise against that. Making sure you answer your sales tax audit notification within the period you are given allows additional trouble to be avoided.
The best course of action to be prepared is to start as soon as possible. But how exactly do you prepare for an audit? The most logical first step is to gather all records that can help prove the veracity of your tax records. What your auditor will ask for will vary. They can ask for documents including, but not limited to:
- Financial statements
- Depreciation schedules
- Shipping receipts
- General ledger
- Sales and purchase records
It is always a clever idea to look through your records before speaking with the auditor so that you know you have your financial timeline in order. Understanding your records also allows you to answer any questions the auditor may ask you directly. Are there missing parts of your sales and purchase records? Are there key documents you need to locate according to your business structure?
Once you go through the process of ensuring your documents are as thorough as possible, you will have better peace of mind when the auditor asks for a random sample of your records.
The sampling of your records is up to the discretion of your auditor. Once they choose a random sample of your records, they can check through a random set of items to make accurate conclusions about your records. Rarely, if ever, do they go through your whole sales tax history.
In short, you want to catch any holes in your records before the auditor does. You will be better prepared to answer questions that way and prove the correctness of your records.
How to avoid a sales tax audit
You cannot fully shield yourself and your business from a random sales tax audit. But there are plenty of best practices you can put in place to avoid them as much as possible.
One of the easiest and best ways to ensure you do not bring on an unnecessary sales tax audit is to know what the sales tax laws of the state you operate in are so that your business is compliant with any existing laws and regulations. This way, you will know for sure what is expected and what the best way of reporting sales tax is.
An easy decision, yet still key step, is to invest the resources necessary to ensure your taxes are both thoroughly documented and filed properly. Investing the time and energy to keep accurate records of your taxes and filing them properly will help you avoid larger (and costly) headaches down the road. This way if you were you to run into a sales tax audit, it will be a breeze to get through with proper documentation to back your tax records properly.
The best way to avoid a frustrating sales tax audit is to outsource your tax needs to a trusted tax advisor so they can steer you in the right direction. Working with a tax advisor withdraws stress from your business operations and allows your company to be well prepared for any sales tax audits that may arise. Regardless of whether you are a growing business or an established operation, ensuring your tax records and sales taxes are filed correctly every year is worth the long-term investment.
State Tax Advisors was created with scenarios like these in mind: We can help
Sales tax audits should not send you in a frenzy if all your tax records are appropriately filed and accounted for. However, it takes initiative to be initiative-taking about the handling of your tax filings and records. By being thorough with your yearly filings and being diligent about keeping records, as old as they may be, you will set yourself up to be able to manage whatever audits come your way.
As a business owner, you are constantly juggling plates in the air as you working to achieve your goals. The problem is that if you juggle too many things at once something is bound to break. This makes it harder to stay on top of changing tax laws or write-offs that could benefit your bottom line. Whether you need a tax audit or help properly prepare your tax filings each year, we are here to help.
Contact State Tax Advisors today to book a free consultation call so that we can answer any questions you may have, and set your business up for continuing success.